March 23 (Bloomberg) -- The Bank of England’s Financial Policy Committee said the outlook for financial stability remains “fragile,” as it made a recommendation to the government on the tools it needs to help strengthen banks.
“Immediate financial-market tensions had subsided somewhat, but the overall outlook for financial stability remained fragile,” the committee said in a statement in London today. While the European Central Bank’s long-term loans helped bank funding costs, “questions remained about the indebtedness and competitiveness of some European countries.”
At its March 16 meeting, the FPC agreed to ask Parliament to give it powers of direction over countercyclical capital buffers, sectoral capital requirements and leverage ratios. It also recommended banks raise more capital “as early as feasible.” The U.K. Treasury had sought guidance from the FPC on the tools it would need as the government overhauls regulation of lenders after the financial crisis.
Systemic risk could stem from “excessive balance-sheet leverage and fragile funding positions, excessively loose terms and conditions of lending and fragilities in market structures,” the FPC said. “These tools would provide control most directly over the balance sheets of a range of financial institutions,” such as banks, building societies, investment firms and insurers.
The FPC, which is currently operating on an interim basis, said in December that officials examined 11 possible tools covering balance sheets, terms and conditions of some transactions, and market structures. Today’s report follows feedback on the proposals.
Officials set aside for now a recommendation that it have powers of direction over loan-to-value and loan-to-income ratios as these would need a “high level of public acceptability.” It said it would welcome further debate on the issue.
The decision demonstrates the government’s proposed regulations leave an “accountability gap” in oversight of the bank’s expanded powers, Andrew Tyrie, the chairman of the cross-party parliamentary committee that scrutinizes the Treasury, said in an e-mailed statement. He said his panel will cross-examine the FPC on the proposals.
“The FPC’s decision not to ask for stronger tools appears to demonstrate clearly that they lack the confidence, at this time, to explain to the wider public why such tools are necessary,” said Tyrie, a member of Prime Minister David Cameron’s Conservative Party. “That is why it is so important that the Bank of England’s accountability to Parliament is put in good shape. If that can be done, the bank will find it much easier to get public acceptance for their decisions.”
Following its November recommendations, the FPC noted banks’ progress in building capital and limiting pay. Still, it said it “remained concerned that capital was not yet at levels that would ensure resilience in the face or prospective risks.”
“It therefore agreed on the need for banks to continue to restrain cash distributions, including via share buybacks,” and to “raise external capital as early as feasible,” it said.
The FPC said that while it was currently recommending a narrow range of tools, it was “important that there was flexibility” to adapt the set quickly if needed.
On the proposed powers, it said a countercyclical capital buffer would allow officials to adjust banks’ capital ratios to reflect the changing risk of losses and limit systemic risks, such as “unsustainable” growth in balance sheets. This tool addresses risks in the entire financial system.
Sectoral capital requirements would allow the FPC to address risks in particular areas such as commercial or residential property lending. The panel said it would avoid an “excessively activist, fine-tuning approach” with this tool.
The leverage ratio limit sought by the FPC could change over time, and would “constrain financial institutions’ ability to increase the overall size of their exposures relative to their capacity to absorb losses,” the FPC said.
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